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Mortgage disclosure forms you must receive: Truth In Lending

November 30th, 2010

When completing a refinance mortgage or new home loan application you will usually receive a package of at least 25 to 30 pages. With a few exceptions almost all the pages are federally mandated disclosures. One of the more confusing forms you will receive is the Truth In Lending form, or TIL. Whether your mortgage application follows using a refinance calculator or a closing costs calculator you must receive a Truth In Lending mortgage disclosure.

When a Truth In Lending form is required

Within three days of receiving a mortgage application a lender or mortgage originator must deliver to you a Truth In Lending form under the Real Estate Settlement Procedures Act (RESPA). The purpose of this form is to provide you with information that will allow you to compare mortgage offerings from different lenders.

If your loan terms change so that your Annual Percentage Rate, or APR, changes by one-eighth of one percent (0.125) during the transaction you must receive another TIL from your lender and/or mortgage originator. Most typically you will receive an additional TIL if your mortgage rate and terms are locked in after your initial application and you and your lender decide to either increase or decrease your mortgage rate along with lowering or raising your costs to close.

Using a closing costs calculator a higher mortgage rate should result in lower costs for closing, conversely a lower mortgage rate should result in higher costs for closing. Comparing the APR between a higher-rate, lower-cost option and a lower-rate, higher-cost option will assist you in determining which option is better for you and your family.

Sorting out the APR

What makes the Truth In Lending form particularly confusing is the Annual Percentage Rate, or APR, disclosure. If you use a monthly payment calculator for a $250,000 30-year fixed rate mortgage with an interest rate of 4.25 percent you will see a result of $1,229.85 per month.

If you look at the payments on the TIL for this same loan you will see listed 359 payments of $1,229.85. However when you look in the first box at the top of your Truth In Lending labeled Annual Percentage Rate or APR, you will notice that the rate listed is probably higher than 4.25 percent. (If the APR is equal to 4.25 percent it means that you are getting a no point-no fee mortgage.)

Closing costs affect the APR

Why would the APR be higher than your mortgage rate? Across the top of the TIL are four boxes: Annual Percentage Rate, Finance Charge, Amount Financed and Total Payments. In looking at the Amount Financed you will notice it is less than $250,000, this is because several of the charges paid as a result of your mortgage transaction are deducted from the $250,000 for calculating the APR.

Mortgage origination fees, discount points, settlement services and some title services are some of the charges deducted for APR purposes. If you have an FHA mortgage or a conventional mortgage that requires mortgage insurance your APR will be higher due to the mortgage insurance.

The APR is calculated using the "amount financed" as the principal amount and solving for percentage rate based on the previously computed monthly payment. Because the monthly payment remains the same but the amount financed is lower than your mortgage amount the laws of math dictate that the computed interest rate is higher. Because the closing costs are used in the APR calculation it is a useful tool to compare mortgages between lenders and also to determine if you are better served getting a higher-rate, lower-cost mortgage or a lower-rate, higher-cost mortgage.

The rest is easy

The Annual Percentage Rate box is the most difficult to understand of the items disclosed on the Truth In Lending form. Finance Charge is the total interest you would pay if you made every payment on time for the 30-year term of your mortgage. Amount Financed was discussed in the APR explanation above. The final box is the total of payments you would make on your mortgage if you make all of your 360 monthly payments on time.

Also disclosed are your monthly payments (including mortgage insurance if applicable), fees for recording, prepayment penalties (if any) and what type of homeowners insurance may be required.

Mortgage calculators can help you calculate monthly payments, closing costs, savings from a refinance mortgage and amortization of your mortgage. What they will not show you are the disclosures required to be delivered to you when you apply for a mortgage. Make sure you are receiving the proper disclosures from your lender or mortgage originator; understanding these disclosures can help you properly compare your mortgage options.